The financial data discussed below is derived from our audited consolidated
financial statements for the fiscal years ended December 31, 2020 and 2019,
which are found elsewhere in this Annual Report on Form 10-K. Our consolidated
financial statements are prepared and presented in accordance with generally
accepted accounting principles in the United States. The financial data
discussed below is only a summary and investors should read the following
discussion and analysis of our financial condition and results of our operations
in conjunction with our consolidated financial statements and the related notes
to those statements included elsewhere in this Annual Report on Form 10-K. This
discussion contains forward-looking statements reflecting our current
expectations that involve risks and uncertainties. Our actual results and the
timing of events may differ materially from those contained in these
forward-looking statements due to a number of factors, including those discussed
in the section entitled "Risk Factors," and elsewhere in this Annual Report on
Form 10-K.
Corporate Overview and History
We are a biopharmaceutical company primarily focused on the development of
pharmaceuticals for chronic diseases driven by inflammation. We also have a
commercial business unit that markets dietary supplements for inflammatory
health. CDX-101, our astaxanthin pharmaceutical candidate, is being developed
for cardiovascular inflammation and dyslipidemia, with a target initial
indication of severe hypertriglyceridemia. CDX-301, our zeaxanthin
pharmaceutical candidate, is being developed for macular degeneration. Our
pharmaceutical candidates are currently in pre-clinical development, including
the planning of IND enabling studies. ZanthoSyn® is a physician recommended
astaxanthin dietary supplement for inflammatory health. We sell ZanthoSyn®
primarily through wholesale and e-commerce channels. The safety and efficacy of
our products have not been directly evaluated in clinical trials or confirmed by
the FDA.
At present we are not able to estimate if or when we will be able to generate
sustained revenues. Our financial statements have been prepared assuming that we
will continue as a going concern; however, given our recurring losses from
operations, our independent registered public accounting firm has determined
there is substantial doubt about our ability to continue as a going concern.
Results of Operations
Results of Operations for the Years Ended December 31, 2020 and 2019
The following table reflects our operating results for the years ended December
31, 2020 and 2019:
Year ended Year ended
Operating Summary December 31, 2020 December 31, 2019 Change
Revenues, net $ 538,946 $ 710,949 $ (172,003 )
Cost of Goods Sold (196,130 ) (345,393 ) 149,263
Gross Profit 342,816 365,556 (22,740 )
Operating Expenses (3,405,452 ) (4,442,659 ) 1,037,207
Net Operating Loss (3,062,636 ) (4,077,103 ) 1,014,467
Other Expenses, net (1,992,871 ) (1,015,934 ) (976,937 )
Net Loss $ (5,055,507 ) $ (5,093,037 ) $ 37,530
51
Operating Summary
Our revenues presently derive from the sale of ZanthoSyn® primarily through
wholesale and, to a lesser extent, e-commerce channels. We launched our
e-commerce channel in 2016 and began selling to GNC stores in 2017. ZanthoSyn®
is available at GNC corporate stores nationwide. As a result, revenues were
$538,946 and $710,949 for the years ended December 31, 2020 and 2019,
respectively. The decrease in revenues for the year ended December 31, 2020 was
primarily attributed to decreased sales, which we believe were related to the
COVID-19 pandemic and GNC's Chapter 11 reorganization. Costs of goods sold were
$196,130 and $345,393 for the years ended December 31, 2020 and 2019,
respectively, and included costs of the product, shipping and handling, sales
taxes, merchant fees, and other costs incurred on the sale of goods. Gross
profits were $342,816 and $365,556 for the years ended December 31, 2020 and
2019, which represented gross profit margins of 64% and 51%, respectively.
Operating expenses were $3,405,452 and $4,442,659 for the years ended December
31, 2020 and 2019, respectively. Operating expenses primarily consisted of
services provided to the Company, including payroll, consultation, and contract
services, for research and development, including our clinical trial and
pharmaceutical development programs, sales and marketing, and administration.
These expenses were paid in accordance with agreements entered into with each
employee or service provider. Included in operating expenses were $632,500 and
$708,588 in stock-based compensation for the years ended December 31, 2020 and
2019, respectively.
Other expenses, net, were $1,992,871 and $1,015,934 for the years ended December
31, 2020 and 2019, respectively. For the year ended December 31, 2020, other
expenses, net, primarily consisted of interest expense of $2,384,635, gain on
change in the fair value of derivative liabilities of $222,707, gain on
modification of debt instruments of $394,924, other income of $30,000, loss on
the abandonment of patents of $98,056, and loss on the abandonment of pending
stock issuance costs of $157,811. For the year ended December 31, 2019, other
expenses, net, primarily consisted of interest expense of $623,415, loss on
change in the fair value of derivative liabilities of $356,314, and loss on the
abandonment of patents of $36,205.
Assets and Liabilities
Assets were $1,425,172 and $2,018,922 as of December 31, 2020 and 2019,
respectively. The decrease was primarily due to decreases in accounts receivable
and inventory. At December 31, 2020 and 2019, cash totaled $19,179 and $19,303,
respectively. Negative working capital was $9,429,734 and $6,547,114 as of
December 31, 2020 and 2019, respectively, and was primarily due to accrued
payroll and paid time off of $4,362,381 and $3,687,376, accrued Board of
Director fees and related consultation of $418,546, accounts payable of
$1,689,352 and $1,544,402, and the aggregate current liability related to notes
payable, convertible notes payable, and derivative liability on convertible
notes payable, of $4,018,292 and $2,412,324, less current assets of $1,121,799
and $1,586,061, respectively. The issuance of convertible notes resulted in
derivative liabilities of $235,165 and $827,314 as of December 31, 2020 and
2019, respectively; however, these are non-cash amounts and do not directly
impact our liquidity or capital needs.
52
Liquidity and Capital Resources
Since our inception, we have sustained operating losses and have used cash
raised by issuing securities. We expect to continue to operate with a net loss
until we are able to develop and commercialize our pharmaceutical product
candidates. During the years ended December 31, 2020 and 2019, we used cash in
operating activities of $1,791,583 and $3,522,837, respectively, and incurred
net losses of $5,055,507 and $5,093,037, respectively.
As of December 31, 2020, we had a U.S. federal income tax net operating loss
("NOL") carryforward of approximately $46 million. These NOLs may be available
to offset our future taxable income to the extent permitted under the Internal
Revenue Code (the "IRC"). Under IRC Section 382, the use of NOL carryforwards,
capital loss carryforwards, and other tax credit carryforwards may be
significantly limited if a change in ownership of a company occurs. A change in
ownership under IRC Section 382 is defined, generally, as a cumulative change of
50 percentage points or more in the ownership positions of certain stockholders
owning 5% or more of a company's common stock over a three-year rolling period.
If we were to have a change of ownership within the meaning of IRC Section 382,
then under certain conditions, our annual federal NOL utilization could be
limited to an amount equal to our market capitalization (valued at the time of
the ownership change) multiplied by the federal long-term tax exempt rate.
Our existing liquidity is not sufficient to fund our operations, including
payroll, anticipated capital expenditures, working capital, and other financing
requirements for the foreseeable future. We require additional financing in
order to continue to fund our operations and to pay existing and future
liabilities and other obligations, and may require more financing than
anticipated, especially if we experience downturns or cyclical fluctuations in
our business that are more severe or longer than anticipated, or if we
experience significant increases in the cost of manufacturing, research and
development, or sales and marketing activities, or increases in our expense
levels resulting from being a publicly-traded company.
Our working capital and capital requirements at any given time depend upon
numerous factors, including, but not limited to:
? revenues from the sale of any products or licenses;
? costs of production, marketing and sales capabilities, or other operating
expenses; and
? costs of research, development, and commercialization of our products and
technologies.
Our largest customer, GNC, filed for Chapter 11 reorganization under the U.S.
Bankruptcy Code on June 23, 2020. As a result, we wrote off receivables from GNC
in the amount of $69,934 during the year ended December 31, 2020. We cannot
predict the extent of the impact that GNC's reorganization will have on our
future sales and receivables. On October 7, 2020, GNC announced it had emerged
from bankruptcy as GNC Holdings, LLC, a Delaware company, owned indirectly by
Harbin Pharmaceutical Group Co., Ltd., a large Chinese pharmaceutical company
("Harbin"), through its wholly-owned subsidiary, ZT Biopharmaceutical LLC, a
Delaware company. Harbin was previously GNC's largest stockholder and acquired
the company for approximately $770 million according to public reports.
We have undertaken certain actions regarding the advancement of our
pharmaceutical development program, the conduct of a dietary supplement clinical
trial, and the continued sales and marketing of our commercial dietary
supplement. We plan to fund such activities, including compensation to service
providers, with a combination of cash and equity payments. The amount of
payments in cash and equity will be determined by us from time to time.
We will incur ongoing recurring expenses associated with professional fees for
accounting, legal, and other expenses for annual reports, quarterly reports,
proxy statements, and other filings under the Exchange Act. We estimate that
these costs will likely be in excess of $250,000 per year. These obligations
will reduce our ability and resources to fund other aspects of our business. We
hope to be able to use our status as a public company to increase our ability to
use non-cash means of settling obligations and compensate certain independent
contractors who provide professional services to us, although there can be no
assurances that we will be successful in any of those efforts.
53
As of the date hereof, we have outstanding promissory notes that are (i) due in
the 2021 calendar year in the aggregate principal amount of $4,031,223, of which
$3,262,223 has terms for conversion and/or repayment amortization, (ii) due in
the 2022 calendar year in the aggregate principal amount of $1,461,300, of which
$250,000 has terms for conversion and/or repayment amortization and $211,300 has
terms for forgiveness and otherwise for repayment amortization starting in 2021,
and (iii) due in the 2026 calendar year in the aggregate principal amount of
$211,359, which has terms for forgiveness and otherwise for repayment
amortization starting in 2022. Our ability to repay any and all of these notes
as they become due if not otherwise repaid or converted on or prior to the
maturity dates described above is uncertain and will be based on our ability to
raise additional capital, generate additional revenues, and/or modify the terms
of such debt instruments to the extent necessary.
We need additional capital to fund our operations and pay our current and future
obligations, including without limitation our outstanding promissory notes;
however, our ability to access the capital markets or otherwise raise such
capital is unknown during the COVID-19 pandemic and there can be no assurance
that we will be able to obtain sufficient amounts of capital as and when needed.
During the years ended December 31, 2020 and 2019, we raised financing of
$2,515,300 and $3,360,000, respectively, primarily through the issuance of
promissory notes. We intend to raise additional capital to fund our operations
for at least the next twelve months and may seek financing from investors
through the issuance of equity, debt, or convertible debt securities. We cannot
give any assurance that additional financing will be available to us on
acceptable terms and conditions, or at all.
We filed a registration statement on Form S-1 on August 14, 2019, as amended
September 27, 2019, and November 22, 2019, for a proposed $15 million public
offering of our common stock and warrants and the listing of our common stock
and such warrants on the Nasdaq Capital Market. We continued to take actions to
advance the proposed public offering in 2020, but due to COVID-19 related travel
restrictions, financial market conditions, and other considerations, the public
offering was not consummated. In March 2021, we requested withdrawal of the
registration statement from the Commission.
In July 2020, we submitted a grant application to a federal government agency to
fund a proposed clinical trial with one of our astaxanthin products in COVID-19
patients. In January 2021, we submitted an updated grant application to address
the comments received from the agency's reviewers. We are also pursuing other
governmental and non-governmental sources of funding for COVID-19 clinical
trials. If awarded, any such grant funding would provide non-dilutive capital,
but we cannot give any assurance that we will receive any grant funding or the
amount or timing or extent of restrictions thereof or our obligations related
thereto.
We recently launched a private placement of our preferred stock for an aggregate
amount of up to $10 million, or such other amount as we may determine. The
offering may have more than one closing and had an initial closing of $50,000 on
January 11, 2021. We cannot give any assurance that additional closings will be
consummated in a timely manner, or at all.
Our stockholders may be diluted upon the exercise or conversion of our
outstanding warrants, options, preferred stock, and convertible notes, including
as previously disclosed, certain of our outstanding notes that have rights to
convert into shares of our common stock upon certain dates or events at prices
that may cause substantial dilution.
Any inability to obtain additional financing will materially and adversely
affect us, including requiring us to significantly curtail or cease business
operations altogether. We cannot give any assurance that we will in the future
be able to achieve a level of profitability from the sale of existing or future
products or otherwise to sustain our operations. These conditions raise
substantial doubt about our ability to continue as a going concern. The
accompanying financial statements do not include any adjustments to reflect the
possible future effects on recoverability and reclassification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.
54
The following is a summary of our cash flows provided by (used in) operating,
investing, and financing activities during the periods indicated:
Year ended Year ended
Cash Flow Summary December 31, 2020 December 31, 2019
Net Cash from Operating Activities $ (1,791,583 ) $ (3,522,837 )
Net Cash from Investing Activities (14,613 ) (61,613 )
Net Cash from Financing Activities 1,806,072 3,360,000
Net Cash Decrease (124 ) (224,450 )
Cash at Beginning of Year 19,303 243,753
Cash at End of Year $ 19,179 $ 19,303
Cash Flows from Operating Activities
During the years ended December 31, 2020 and 2019, our operating activities
primarily consisted of receipts and receivables from sales, payments or accruals
for employees, directors, and consultants for services related to
administration, sales and marketing, and research and development. The decrease
in cash used in operating activities for the year ended December 31, 2020,
primarily related to a combination of decreased operating expenses and increased
accruals for accounts payable and accrued payroll.
Cash Flows from Investing Activities
During the years ended December 31, 2020 and 2019, our investing activities were
primarily related to expenditures on patents.
Cash Flows from Financing Activities
During the years ended December 31, 2020 and 2019, our financing activities
consisted of transactions in which we raised proceeds through the issuance of
debt and equity securities.
During the year ended December 31, 2020, we raised proceeds from the issuance of
convertible notes payable in the aggregate amount of $1,720,000, the issuance of
related party convertible notes payable in the amount of $340,000, the issuance
of a forgivable note payable in the amount of $211,300, the issuance of a note
payable in the amount of $25,000, and the issuance of related party notes
payable in the amount of $219,000. During the year ended December 31, 2020, we
repaid outstanding convertible notes payable in the aggregate amount of
$529,228, an outstanding note payable in the amount of $25,000, and an
outstanding related party note payable in the amount of $25,000, and we paid
debt issuance costs in the aggregate amount of $40,000.
During the year ended December 31, 2019, we raised proceeds from the issuance of
common stock in the aggregate amount of $245,000, the issuance of related party
notes payable in the aggregate amount of $1,575,000, the issuance of convertible
notes payable to related parties in the amount of $1,050,000, and the issuance
of convertible notes payable in the aggregate amount of $490,000.
Recently Issued Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2018-13, Fair Value Measurement. This
ASU modifies the disclosure requirements on fair value measurements in Topic
820, Fair Value Measurement, based on the concepts in the FASB's Concepts
Statement, including the consideration of costs and benefits. The guidance in
ASU No. 2018-13 is effective for annual reporting periods, and interim periods
within those years, beginning after December 15, 2019. The Company is currently
in the process of evaluating the impact of the adoption of this ASU on its
consolidated financial statements.
55
In November 2019, the FASB issued ASU No. 2019-08, Compensation-Stock
Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606).
The amendments in this Update require that an entity apply the guidance in Topic
718 to measure and classify share-based payment awards granted to a customer.
The amount recorded as a reduction in the transaction price should be based on
the grant-date fair value of the share-based payment award. The guidance in ASU
No. 2019-08 is effective fiscal years beginning after December 15, 2019, and
interim periods within fiscal years beginning after December 15, 2020. The
Company is currently in the process of evaluating the impact of the adoption of
this ASU on its consolidated financial statements.
In December 2019, the FASB Issued ASU No. 2019-12, Income Taxes (Topic 740)
Simplifying the Accounting for Income Taxes. The amendments in this Update
simplify the accounting for income taxes by removing certain exceptions to the
general principles in Topic 740. The amendments also improve consistent
application of and simplify U.S. GAAP for other areas of Topic 740 by clarifying
and amending existing guidance. For public business entities, the amendments in
this Update are effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2020. The Company is currently in the
process of evaluating the impact of the adoption of this ASU on its consolidated
financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt-Debt with Conversion and
Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in
Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments
and Contracts in an Entity's Own Equity, which simplifies accounting for
convertible instruments by removing major separation models required under
current U.S. GAAP. ASU No. 2020-06 removes certain settlement conditions that
are required for equity contracts to qualify for the derivative scope exception
and it also simplifies the diluted earnings per share calculation in certain
areas. ASU No. 2020-06 is effective for the Company for fiscal years beginning
after December 15, 2023, including interim periods within those fiscal years.
Early adoption is permitted, but no earlier than fiscal years beginning after
December 15, 2020 and adoption must be as of the beginning of the Company's
annual fiscal year. The Company is currently evaluating the impact of this
standard on its consolidated financial statements and related disclosures.
Management does not believe that any other recently issued, but not yet
effective accounting pronouncements, if adopted, would have a material effect on
the consolidated financial statements.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures, or capital resources.
© Edgar Online, source Glimpses
CARDAX, INC. 
